Housing Sector 56% Back to Normal

If the housing recovery were a home, the foundation, framing, roof, windows and siding would all be in place. Now the industry has to complete the second half of its return to normal. This is where progress can slow down.

Despite some March setbacks that could be weather-related, housing construction and demand look firmly in recovery. The latest piece of news was the 1.5% rise of new-home sales in March and the continued increase in home prices through February.

These trends are just as the Federal Reserve intended when it aimed to bring long-term interest rates down. Better housing activity helps the overall economy, and consumer spending benefits from rising home prices and the ability to refinance mortgages.

According to calculations by housing website Trulia, the housing sector is 56% back to normal. Trulia compares the current levels of starts, existing-home sales, and the rate of delinquencies and foreclosures versus their worst readings of the recession and their prebubble normal levels.

Of course, “normal” is subjective. Like other sectors, housing faces a New Normal in the post-Great Recession world. But a year ago, housing was only one-third of the way back, says Trulia, “so the last year has been a significant recovery.”

But just as with any recovery, the second stage is harder. Progress will be more incremental.

On the supply side, builders are already reporting difficulties amassing inputs. Developed land is scarcer, materials are more expensive, and skilled craftsman harder to find. Finding the right combination of inputs will limit the number of housing starts this year.

On the demand side, the best-qualified borrowers have probably tapped the mortgage market already. Other home buyers face high–sometime insurmountable–hurdles to get a loan.

“I expect [housing] demand to come from a pickup in new household formation, but I also recognize that these households may be the very population that faces especially tight credit conditions,” she said.

Second, future demand will depend on job and income growth picking up. But the U.S. economy is experiencing a slowdown, which may mean weaker hiring this spring as well–perhaps not as dismal as March’s 88,000-job gain, but less than 200,000 a month.

The challenges do not look strong enough to derail housing. But the journey to the New Normal will not be smooth nor quick.

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